If you still don’t fully understand all the changes brought about by the new tax law, you’re not alone. The Tax Cuts and Jobs Act of 2017 made significant amendments to the Internal Revenue Code of 1986. Below is a continuation of Part 1 of this Practice Point regarding additional amendments that may have a direct impact on financial issues commonly addressed in a divorce.
6. Increase in and Modification of the Child Tax Credit
The child tax credit provided the taxpayer with up to a $1,000 nonrefundable credit for qualifying children. Unlike the personal exemption deduction, the credit is subtracted after the calculation of the tax liability, resulting in a dollar-for-dollar reduction in the taxpayer’s liability. This credit was subject to phase out when adjusted gross incomes exceeded $75,000 for single and head of household filers.
This credit is now much more valuable, being increased from $1,000 to $2,000. The income level subject to phase out has been significantly increased to $200,000 of adjusted gross income for single and head of household filers. These changes make the credit much more valuable to many taxpayers and should not be overlooked in agreements.
7. Significant Changes to Itemized Deductions
The ability to itemize deductions has been significantly changed. One of the most notable is the limitation of the deduction for state and local taxes. This has historically been a major deduction for many taxpayers when itemizing their deductions. Now deductions for state income taxes, sales taxes, real estate taxes, vehicle taxes, and personal property taxes have been capped at only $10,000 total.
Limitations have also been placed on the deduction of qualified residence interest and home equity interest. Qualified residence interest was previously unlimited on mortgages up to $1.0 million, but that threshold has been reduced to $750,000 for homes bought after December 15, 2017. (Exemptions to this rule apply for refinances after December 15, 2017, to the extent the new indebtedness does not exceed the old indebtedness.) Home equity interest, or interest on indebtedness not used to buy, build, or substantially improve a qualified residence (think equity line used to buy a car or pay off personal credit card debt) was previously unlimited on indebtedness up to $100,000. This deduction has now been eliminated entirely with no grandfathering of existing debt.
8. Increase in the Standard Deduction
Taxpayers can either chose to itemize their deductions or simply claim the standard deduction if their itemized deductions are less. While itemized deductions have been significantly curtailed, the standard deduction has been nearly doubled. For 2018, the standard deduction for single filers has increased from $6,500 to $12,000 and $9,550 to $18,000 for taxpayers filing as head of household. This will help to limit the number of taxpayers that need to itemize their deductions and help to provide some relief for the limitations imposed on itemized deductions and the elimination of the personal exemption deduction.
9. Changes in Bracketed Rates
While there are still seven tax brackets, both the rates and the income bands within those brackets were adjusted. Most single and head of household filers will have a lower effective tax rate but determining if an individual will pay more or less tax under the new rules must be done so on an individual basis with consideration of all the changes previously discussed.
10. Expanded Use of 529 Plans
529 college savings plans have historically been restricted to paying for qualified higher education expenses. These funds can now be used for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. This use is limited each taxable year to $10,000 per beneficiary. Contributions to a 529 Plan may be tax deductible for tax purposes depending on your jurisdiction. With no time limit on how long contributions must be held before being used, taxpayers now have the ability to make contributions to their plan for a child and immediately withdraw the funds for expenses associated with enrollment or attendance at an elementary or secondary public, private, or religious school and receive a tax deduction for it. Keep in mind though that total contributions may be limited to $426,000 for a single beneficiary.
Richard Livingston is a director at Dixon Hughes Goodman LLP in Charleston, South Carolina.
This Practice Point originally appeared in the South Carolina Bar Family Law Council’s Spring 2018 Newsletter.